We consider the EOQ model with an opportunity cost of capital, i.e. an amount x invested now will yield (1+i)x at the beginning of the next period. Here i is the interest rate. Given a cost stream i.e. a stream of costs incurred over time, the Net Present Value (NPV) is used to decide the total cost of the cost stream. This total cost takes into account the opportunity cost of capital. The Discounted Average Cost changes the NPV, which is a total, into a cost rate per unit time. The discounted average cost is a cost rate. If we incur this cost rate for the entire period of time under consideration, it will lead to the same NPV as the actual NPV of the cost stream. The discounted average cost under continuous compounding is thus an alternative objective to the standard objective of average cost, which is also a cost rate. We minimize the discounted average cost under continuous compounding for two EOQ models, one with a regular product and the other with a perishable product. Perishable products include food, medicines, certain chemicals and blood in blood banks. In the EOQ model with a perishable product, inventory decays at a constant rate over time. We find the optimal order quantity for the two models while minimizing discounted average cost under continuous compounding.
| Published in | American Journal of Operations Management and Information Systems (Volume 3, Issue 2) |
| DOI | 10.11648/j.ajomis.20180302.13 |
| Page(s) | 52-60 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2018. Published by Science Publishing Group |
Inventory, EOQ Model, Discounted Average Cost, Continuous Compounding, Perishable Product
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APA Style
Siddharth Mahajan, Krishna Sundar Diatha. (2018). Minimizing the Discounted Average Cost Under Continuous Compounding in the EOQ Models with a Regular Product and a Perishable Product. American Journal of Operations Management and Information Systems, 3(2), 52-60. https://doi.org/10.11648/j.ajomis.20180302.13
ACS Style
Siddharth Mahajan; Krishna Sundar Diatha. Minimizing the Discounted Average Cost Under Continuous Compounding in the EOQ Models with a Regular Product and a Perishable Product. Am. J. Oper. Manag. Inf. Syst. 2018, 3(2), 52-60. doi: 10.11648/j.ajomis.20180302.13
AMA Style
Siddharth Mahajan, Krishna Sundar Diatha. Minimizing the Discounted Average Cost Under Continuous Compounding in the EOQ Models with a Regular Product and a Perishable Product. Am J Oper Manag Inf Syst. 2018;3(2):52-60. doi: 10.11648/j.ajomis.20180302.13
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Download@article{10.11648/j.ajomis.20180302.13,
author = {Siddharth Mahajan and Krishna Sundar Diatha},
title = {Minimizing the Discounted Average Cost Under Continuous Compounding in the EOQ Models with a Regular Product and a Perishable Product},
journal = {American Journal of Operations Management and Information Systems},
volume = {3},
number = {2},
pages = {52-60},
doi = {10.11648/j.ajomis.20180302.13},
url = {https://doi.org/10.11648/j.ajomis.20180302.13},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajomis.20180302.13},
abstract = {We consider the EOQ model with an opportunity cost of capital, i.e. an amount x invested now will yield (1+i)x at the beginning of the next period. Here i is the interest rate. Given a cost stream i.e. a stream of costs incurred over time, the Net Present Value (NPV) is used to decide the total cost of the cost stream. This total cost takes into account the opportunity cost of capital. The Discounted Average Cost changes the NPV, which is a total, into a cost rate per unit time. The discounted average cost is a cost rate. If we incur this cost rate for the entire period of time under consideration, it will lead to the same NPV as the actual NPV of the cost stream. The discounted average cost under continuous compounding is thus an alternative objective to the standard objective of average cost, which is also a cost rate. We minimize the discounted average cost under continuous compounding for two EOQ models, one with a regular product and the other with a perishable product. Perishable products include food, medicines, certain chemicals and blood in blood banks. In the EOQ model with a perishable product, inventory decays at a constant rate over time. We find the optimal order quantity for the two models while minimizing discounted average cost under continuous compounding.},
year = {2018}
}
TY - JOUR T1 - Minimizing the Discounted Average Cost Under Continuous Compounding in the EOQ Models with a Regular Product and a Perishable Product AU - Siddharth Mahajan AU - Krishna Sundar Diatha Y1 - 2018/08/17 PY - 2018 N1 - https://doi.org/10.11648/j.ajomis.20180302.13 DO - 10.11648/j.ajomis.20180302.13 T2 - American Journal of Operations Management and Information Systems JF - American Journal of Operations Management and Information Systems JO - American Journal of Operations Management and Information Systems SP - 52 EP - 60 PB - Science Publishing Group SN - 2578-8310 UR - https://doi.org/10.11648/j.ajomis.20180302.13 AB - We consider the EOQ model with an opportunity cost of capital, i.e. an amount x invested now will yield (1+i)x at the beginning of the next period. Here i is the interest rate. Given a cost stream i.e. a stream of costs incurred over time, the Net Present Value (NPV) is used to decide the total cost of the cost stream. This total cost takes into account the opportunity cost of capital. The Discounted Average Cost changes the NPV, which is a total, into a cost rate per unit time. The discounted average cost is a cost rate. If we incur this cost rate for the entire period of time under consideration, it will lead to the same NPV as the actual NPV of the cost stream. The discounted average cost under continuous compounding is thus an alternative objective to the standard objective of average cost, which is also a cost rate. We minimize the discounted average cost under continuous compounding for two EOQ models, one with a regular product and the other with a perishable product. Perishable products include food, medicines, certain chemicals and blood in blood banks. In the EOQ model with a perishable product, inventory decays at a constant rate over time. We find the optimal order quantity for the two models while minimizing discounted average cost under continuous compounding. VL - 3 IS - 2 ER -
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